Why Investors Should Remember the Dunning-Kruger Effect

A surging stock market is thrilling. This excitement comes not only from rising share prices but from the vindication of knowing our investments were a wise decision. However, can we really congratulate ourselves? The Dunning-Kruger effect says no.

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The Extent of One’s Ignorance

Often, we remind others of the famous adage that wisdom comes from acknowledging our limitations. Rarely do we consider this phrase when evaluating our own choices. The Dunning-Kruger effect, a cognitive bias, illustrates that we frequently overestimate the abilities of our intellect. This term comes from a 1999 research paper authored by Justin Kruger and David Dunning.

This bias is particularly dangerous because it compounds a problem. First, we make poor decisions as a result of unwarranted confidence. Then, this same overestimation prevents us from learning that the error arose from our faults.

The researchers uncovered this phenomenon when realizing that participants who received scores in the bottom quartile of logic tests “grossly overestimated their test performance and ability.” This loop perpetuates leading to one bad decision after another without the individual ever coming to terms with the root of the problem: themselves.

Investors Beware

The Dunning-Kruger effect doesn’t assert that we’re all fools. However, the valuable research does serve as a reminder that sometimes we must step back and take a closer look at our actual abilities. Put succinctly, “You better check yourself before you wreck yourself.”

David Dunning later wrote, “This isn’t just an armchair theory. A whole battery of studies conducted by myself and others have confirmed that people who don’t know much about a given set of cognitive, technical, or social skills tend to grossly overestimate their prowess and performance, whether it’s grammar, emotional intelligence, logical reasoning, firearm care and safety, debating, or financial knowledge.”

Today’s technology is perpetuating this bias. More than ever we’re able to insulate ourselves by curating our own news and research. This practice limits our purview. We seek out information that only serves to reinforce our beliefs. This tendency is particularly dangerous for investors.

When we limit the scope of information relating to an investment choice we risk missing critical signals. However, there is a way to break out of this loop.

Getting the Entire Picture

KINFO users fight the Dunning-Kruger effect by sharing ideas among a community of investors who want to acknowledge their limits then move past them. Sharing investing ideas means challenging assumptions. Removing yourself from a comfort zone can reveal ideas and strategies that broaden investment acumen.

Users can independent of location share insights that will reform your understanding of the stock market. Discover how other users apply both active and passive strategies which if employed properly, can help you find confidence with your investments.

These ideas expand as our community grows. Step back from your portfolio and renew your perspective on what’s possible and what’s holding you back. Once you learn to understand the boundaries of your thinking you can eventually change them and move beyond an ordinary return.

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